Yum Cha 飲茶 INDICES Closing DoD% Hang Seng Index 20,259.1 (2.9) HSCEI 8,530.1 (2.9) Shanghai COMP 2,854.3 (1.3) Shenzhen COMP 1,900.6 (0.8) Gold 1,333.5 4.7 BDIY 609.0 2.2 Crude Oil, WTI(US$/BBL) 47.2 (1.0) Crude Oil, BRENT(US$/BBL) 48.0 (0.8) HIBOR, 3-M 0.5 0.2 SHIBOR, 3-M 3.0 0.1 RMB/USD 6.6 0.6 DATA RELEASES DUE THIS WEEK Jun 27 Leading Index Jun 28 Westpac-MNI Consumer Sentiment Jun 29 Swift Global Payments CNY Jun 29 BoP Current Account Balance Jun 30 Manufacturing PMI Jun 30 Non-manufacturing PMI Jun 30 Caixin China PMI Mfg Source: Bloomberg TALKING POINT - STOCKS WITH HIGHER EARNINGS VISIBILITY June 27, 2016 Company name Price Market cap 2016E 2017E Dividend Rating PER (x) PBR (x) (HK$) (HK$m) PER (x) PER (x) yield (%) 958 HK Equity Huaneng Renew ables Corp Ltd 2.42 23,542 BUY 10.80 9.58 8.07 1.13 1.45 916 HK Equity China Longyuan Pow er Group Corp Ltd 6.06 48,701 BUY 14.42 12.29 10.95 1.18 1.40 968 HK Equity Xinyi Solar Holdings Ltd 2.99 20,179 BUY 16.13 10.68 8.08 3.51 2.92 855 HK Equity China Water Affairs Group Ltd 4.13 6,277 BUY 15.45 12.52 10.87 1.41 1.69 1093 HK Equity CSPC Pharmaceutical Group Ltd 6.52 38,540 BUY 21.76 19.18 15.52 4.41 1.68 867 HK Equity China Medical System Holdings Ltd 11.24 27,957 BUY 23.75 17.35 14.37 4.50 1.72 3311 HK Equity China State Construction International 9.84 44,163 BUY 9.54 7.81 6.47 1.89 3.15 1317 HK Equity China Maple Leaf Educational Systems Ltd 6.63 9,015 BUY 33.27 28.09 23.41 4.24 0.63 8 HK Equity PCCW Ltd 4.95 38,143 NR 16.19 14.69 13.27 3.42 5.05 823 HK Equity LINK REIT 49.7 111,036 NR 6.92 22.75 21.61 0.88 4.15 The surprising win of the Leave camp in the Brexit referendum last Friday led to huge market volatility. As the future of the European Union remains highly uncertain in the near term, we have prepared a list of stocks under our coverage with higher earnings visibility for investors reference. The list includes stocks for the renewables, water utilities, pharmaceuticals, construction and education sectors. We also include two stocks without any track record of cutting regular DPS in the past five years. PCCW (0008.HK) is offering >5% dividend yield, and LINK REIT (0823.HK) is offering >4% yield. Both stocks have been largely range-bound recently because of concerns about the US rate hike. However, the market turmoil last week should largely lower the possibility of a rate hike in Q3, and investors are likely to revisit yield plays in a volatile market, in our view. In addition, both companies collect most of their revenue in HKD, which is free from the risk of RMB depreciation. RESEARCH NOTES Sources: Bloomberg, CGIS Research Analyst: Wong Chi-man, CFA SHUN TAK [0242.HK; HK$2.40; NOT RATED]- We believe the Company s core earnings in 2016 and 2017 will be unexciting because of limited revenue booking from its property business and the lower indirect dividend from SJM (0880.HK). However, there will be a substantial jump in profit in 2018 with revenue booking from Macau Nova City Phase 5 (we estimate potential attributable pre-tax profit to Shun Tak is about HK$6.5bn (89% of its current market cap)) and the one-off pre-tax profit of HK$1.3bn from the transaction with the Abu Dhabi Investment Authority (ADIA). With a net cash position of HK$3.48bn (47.6% of total market cap) and a PBR of 0.28x (Note: NAV per share is about HK$10 based on street estimates), the Company is clearly undervalued on an absolute basis and its historical trading range. Given the lacklustre earnings outlook in 2016 and 2017, further cooperation with the ADIA or other reputable partners in investment projects will be the key to drawing more attention from investors and triggering a re-rating. CHINA CEMENT WEEKLY Last week the average cement price (nationwide) declined 0.45% week-on-week to RMB 255.42/tonne. Cement prices in part of east China dropped RMB10-20/tonne, owing to weaker execution of production limits in the Yangtze River Delta region. Market demand was still weak in mid-june, led by multi-factors such as rainfall, national college/high school entrance exams (suspension of some construction works to reduce noise levels) and the peak of the harvest season. Daily shipment volume was around 50%-70% in most areas, except in Guangdong and Guangxi, where it was around 80%. Average inventory level (nationwide) was still at 70.56%.
June 27, 2016 Company background. Shun Tak Holdings, which was listed on the main board in 1973, is a conglomerate with businesses including property, transportation, hospitality and investment. Most of its revenue comes from Macau and Hong Kong. The Ho family controls the Company with a combined 58.2% stake. Recap of the transaction with the Abu Dhabi Investment Authority (ADIA). Last Wednesday, Shun Tak announced that it will sell a 50% stake in the Nova City Phase 5 shopping centre (under development) to the ADIA for a total consideration of HK$3.2bn. It is located in Taipa, Macau and has a GFA of 655,000 sq. ft. Shun Tak will collect net proceeds of about HK$3bn and book a pre-tax profit of HK$1.3bn (17.8% of its market cap). Potential for more cooperation with the ADIA. In our discussion with Shun Tak, we learned that one of the goals of the Nova City Phase 5 shopping centre deal with the ADIA was to form a strategic partner relationship. It was not a one-off transaction for short-term capital gains. The Company sees the potential to work with the ADIA because of the latter s investment experience in a wide range of sectors and regions. However, no details have been provided yet. No decision on a special dividend. Since the payment from the ADIA will be settled by installments, with the last payment expected to be settled in Q4 2018, the Company has not made a decision on the payment of a special dividend. The pre-tax disposal gain of about HK$1.3bn will be booked when the deal is fully completed. Property profit to see strong recovery in 2018. The Company s revenue from its property business dropped 85% year-on-year (YoY) to HK$869m in 2015 because of very limited booking of property sales. It expects the revenue booking this year to remain relatively low as sales are expected to come mainly from the Chung Hom Kok Collection, a relatively small luxury residential project with a salable GFA of about 26,000 sq.ft (five houses in total). It plans to sell two units this year; we understand the market price of nearby houses is about HK$50,000-80,000/sq. ft. Property revenue should pick up mildly in 2017 from sales of about 100 units of Nova City Phase 4 (ASP about HK$11,500/sq. ft with average unit size of >1,000 sq.ft. In 2018, revenue booking is likely to be much stronger thanks to Nova City Phase 5 (under development) with a GFA of 2.3m sq. ft. The ASP of nearby projects is about HK$8,000/sq. ft. now. This implies the total revenue of the project may reach about HK$18bn (71% of which is attributable to Shun Tak). We estimate potential attributable pre-tax profit to Shun Tak is about HK$6.5bn (89% of its current market cap). SHUN TAK (0242.HK; NOT-RATED) (HK$) 5 4 3 2 1 0 0 Jun15 Aug15 Oct15 Dec15 Feb16 Apr16 Jun16 Turnover (RHS) Price (LHS) Market Cap: US$941m; Free Float: 37.3% Source: Bloomberg Other promising projects but time required to realize value. Shun Tak owns a 24% stake in Beijing Tongzhou Integrated Development (residential, office and serviced apartments) Phase 1 (GFA: 334,000 m 2 ) and a 19.35% stake in Phase 2 (GFA: 300,000 m 2 ). The projects, which are expected to be completed in 2018, will benefit from the authorities decision to pick Tongzhou to share some of the functions of the Beijing municipal government. According to press reports, the ASP for residential housing in Tongzhou reached RMB35,000/m 2 in May. Another key project is the 70%- owned Hengqin Integrated Development (office, serviced apartments, hotel, commercial) (GFA: 131,000 m 2 ) near Macau. The expected completion date is 2019. About 75% of the GFA will be reserved for leasing. In the medium term, the Company intends to increase its revenue contribution from rental income. (more on next page) (HK$ million) HK$ 2014 2015 2016E 2017E Revenue (m) 9,151 4,116 4,762 5,034 COGS (m) (4,670) (1,495) n.a. n.a. Gross profit (m) 4,482 2,621 n.a. n.a. Gross margin (%) 49 64 n.a. n.a. EBIT (m) 3,242 636 1,315 1,899 Net profit (m) 4,453 745 856 968 Net margin (%) 49 18 18 19 Core net profit 2,577 548 EPS 1.47 0.25 0.28 0.32 ROE (%) 18.73 2.82 3.14 3.16 Dividend yield (%) 2.92 0.83 1.17 2.50 PER (x) 1.6 9.8 8.6 7.5 PBR (x) 0.3 0.3 0.3 0.3 80 60 40 20
Transportation business to remain resilient thanks to low oil prices. Although TurboJET s flagship Hong Kong-Macau ferry routes reported a 2% decline in total passenger throughput (14m) last year, adjusted segment profit still grew 218% YoY to HK$321m as a result of lower fuel costs. As oil prices remain at a relatively low level this year, we expect the transportation business to continue to report earnings growth in 2016, despite lower passenger numbers. Outlook for hospitality business to remain challenging but limited impact on overall performance. The weakness of the Macau tourism industry has adversely affected the Company s hotel business. The occupancy rate for the Mandarin Oriental, Macau remains at a relatively low level. The Hong Kong SkyCity Marriott Hotel also faced some pressure on room rates, but was still able to keep its occupancy rate over 80%. Any further impact on the Company s financial performance should be limited, as this segment accounted for only 4.7% of the total adjusted segment profit in 2015. Investment segment to remain unexciting because of the indirect link with SJM (0880.HK). Shun Tak owns an effective interest in STDM of about 11.5%, which in turn has a 54.13% stake in SJM. The performance of this segment largely reflects the dividend paid by SJM in the previous financial year. As the dividend declared by SJM in 2015 dropped about 70% YoY, it will inevitably affect the dividend to be collected by Shun Tak this year. Unexciting core earnings before 2018 but deeply undervalued; more corporate action will be the key to triggering a rerating. We believe the Company s core earnings in 2016 and 2017 will remain unexciting because of limited revenue booking from its property business and the lower indirect dividend from SJM. However, there will be a substantial jump in profit in 2018 with revenue booking from Macau Nova City Phase 5 and the one-off pre-tax profit of HK$1.3bn from the transaction with the ADIA. With a net cash position of HK$3.48bn (47.6% of total market cap) and a PBR of 0.28x (Note: NAV per share is about HK$10 based on street estimates), the Company is clearly undervalued on an absolute basis and its historical trading range. Given the lackluster earnings outlook in 2016 and 2017, further cooperation with the ADIA or other reputable partners in investment projects will be the key to drawing more attention from investors and triggering a re-rating. Figure 1: PBR of Shun Tak 0.277x Sources: Capital IQ, CGIS Research
Figure 2: 2015 results highlights Y/E Dec 31 (HK$'000) 2014 2015 YoY change Revenues Turnover 9,538,561 4,405,312-53.8% Property 5,909,420 868,840-85.3% Transportation 2,437,768 2,406,098-1.3% Hospitality 772,758 801,889 3.8% Investment 418,615 328,485-21.5% Other Income 257,198 290,496 12.9% Total Revenues 9,795,759 4,695,808-52.1% Expenses Cost of Inventories Sold and Services Provided (4,669,794) (1,494,894) -68.0% Staff Cost (1,234,493) (1,288,973) 4.4% Other Operating Costs (528,003) (636,183) 20.5% Other Gain/(Loss), Net 22,713 23,123 1.8% Depreciation and Amortization (155,387) (153,820) -1.0% Fair Value Changes on Investment Properties 941,420 257,508-72.6% Share of Results of Associates 50,801 (43,753) -186.1% Share of Results of Joint Ventures 1,581,224 122,611-92.2% Finance Costs (135,408) (170,089) 25.6% Earnings before Taxes 5,668,832 1,311,338-76.9% Taxes and Other Expenses Provision for Income Tax (404,999) (138,371) -65.8% Minority Interest (After Tax) (810,924) (428,297) -47.2% Net Income (Loss) 4,452,909 744,670-83.3% Core net profit 2,577,000 548,000-78.7% Adjusted segment profit Property 2,809,000 524,000-81.3% Transportation 101,000 321,000 217.8% Hospitality 93,000 56,000-39.8% Investment 385,000 281,000-27.0% Supplementary Info (HK$) Basic EPS - Continuing Operations 1.47 0.25-83.3% Diluted EPS - Continuing Operations 1.44 0.25-82.9% Sources: Company, CGIS Research
Figure 3a: Schedule of major properties Sources: Company, CGIS Research
Figure 3b: Schedule of major properties Sources: Company, CGIS Research
Figure 3c: Schedule of major properties Sources: Company, CGIS Research
Figure 3d: Schedule of major properties Sources: Company, CGIS Research
China Cement Weekly June 27, 2016 Rainfall and Harvest Season Continued to Cap Cement Price Upside; Asia Cement Intends to Increase Stake in Shanshui Cement China Cement Sector Cement prices down 0.45% week-on-week as result of continuing rainfall. Last week the average cement price (nationwide) declined 0.45% week-on-week to RMB 255.42/tonne. Cement prices in part of east China dropped RMB10-20/tonne, owing to weaker execution of production limits in the Yangtze River Delta region. Market demand was still weak in mid-june, led by multi-factors such as rainfall, national college/high school entrance exams (suspension of some construction works to reduce noise levels) and the peak of the harvest season. Daily shipment volume was around 50%-70% in most areas, except in Guangdong and Guangxi, where it was around 80%. Average inventory level (nationwide) was still at 70.56%. Coal prices stable since early June. The comprehensive average price index for Bohai-Rim Steam Coal (Q5500K) remained at RMB400/tonne last week. The index was 4.0% lower on a year-on-year basis. Asia Cement still intends to increase its stake in Shanshui Cement. The board of directors of China Shanshui Cement [0691.HK] approved a proposal to restore the public float earlier this month, involving an open offer on the basis of four new shares for each existing share, in combination with a placement of new/existing shares to raise about HK$4bn to settle the outstanding debt of the Company, including any outstanding amount for the 2020 Notes. In addition to its major shareholder Tianrui (International) Holding Company s indication of interest in underwriting the rights issue, Asia Cement [1102.TT] revealed its intention this week to increase its stake once trading resumes. As the application for the construction of new clinker production lines has been suspended in China, acquisition is the only way to expand a company s cement business, according to the chairman of Asia Cement. Management of Shanshui Cement intends to resume trading three months from now, according to press reports. Cement stocks under coverage down 0.5% on average. Overall market performance was volatile last week amid concerns of Brexit. Best performer CR Cement [1313.HK; HOLD] was up 1.7%. BBMG[2009.HK;BUY] was the weakest among our coverage stocks, falling 2.1%. Valuation Table Wong Chi Man Head of Research (852) 3698-6317 cmwong@chinastock.com.hk Livy Lyu Research Assistant (852) 3698-6393 livylyu@chinastock.com.hk Sources: Company, Bloomberg, CGIS Research estimates PER (x) PBR (x) EV/EBITDA(x) Net debt/equity (%) Company Ticker Rating Price (HK$) Market cap (US$m) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2016E Anhui Conch 914 HK Equity BUY 17.64 11,343 13.1 9.4 9.4 1.20 1.09 1.01 7.0 5.4 5.1 3 CNBM 3323 HK Equity HOLD 3.33 2,305 25.3 6.4 6.5 0.39 0.37 0.35 9.9 9.5 9.3 218 BBMG 2009 HK Equity BUY 2.28 5,421 11.4 7.7 7.2 0.56 0.55 0.52 8.6 7.3 6.8 63 CR Cement 1313 HK Equity HOLD 2.37 1,985 7.4 10.2 10.3 0.57 0.55 0.54 7.4 6.6 6.7 64 Simple average 14.3 8.4 8.3 0.68 0.64 0.61 8.2 7.2 7.0 87 Weighted average 13.5 8.7 8.6 0.88 0.82 0.77 7.8 6.4 6.1 48 EPS Growth (%) 2015-2017E PEG(x) ROE (%) Dividend yield (%) Company Ticker 2016E 2017E CAGR (%) 2016E 2015 2016E 2017E 2015 2016E 2017E Anhui Conch 914 HK Equity 46.2 5.2 24.0 0.4 8.93 12.09 11.66 2.9 3.2 3.2 CNBM 3323 HK Equity 315.0 2.4 106.1 0.1 1.49 5.95 5.80 1.3 2.1 2.3 CR Cement 1313 HK Equity (28.0) (0.1) (15.2) (0.5) 7.51 5.49 5.33 3.4 2.1 1.8 BBMG 2009 HK Equity 56.0 11.1 31.7 0.3 5.41 7.42 7.70 1.8 1.5 1.5 Simple average 97.3 4.6 36.7 0.1 5.84 7.74 7.62 2.4 2.2 2.2 Weighted average 71.2 5.9 31.3 0.3 7.08 9.59 9.40 2.5 2.5 2.5
Peer Comparison Market cap PER (x) PBR (x) EV/EBITDA(x) Company Ticker Rating Price (LC) (US$m) 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E Anhui Conch 914 HK Equity BUY 17.64 11,343 13.1 9.4 9.4 1.20 1.09 1.01 7.0 5.4 5.1 CNBM 3323 HK Equity HOLD 3.33 2,305 25.3 6.4 6.5 0.39 0.37 0.35 9.9 9.5 9.3 BBMG 2009 HK Equity BUY 2.28 5,421 11.4 7.7 7.2 0.56 0.55 0.52 8.6 7.3 6.8 CR Cement 1313 HK Equity HOLD 2.37 1,985 7.4 10.2 10.3 0.57 0.55 0.54 7.4 6.6 6.7 TCC International 1136 HK Equity NR 1.24 786 - - 24.8 0.31 0.32 0.32 8.1 11.8 8.6 China National Materials 1893 HK Equity NR 1.68 769 6.6 7.2 5.4 0.34 0.32 0.29 6.5 6.0 5.5 Asia Cement 743 HK Equity NR 1.35 271 - - 52.3 0.20 0.20 0.21 6.5 11.2 8.9 West China Cement 2233 HK Equity NR 1.59 1,105-23.8 17.6 1.26 1.33 1.30 9.7 9.5 7.2 Tianrui Cement 1252 HK Equity NR 2.20 677 14.7 n.a. n.a. 0.60 n.a. n.a. 10.1 n.a. n.a. Simple average 4.3 8.1 16.7 0.54 0.59 0.57 8.2 8.4 7.2 Weighted average 12.1 8.7 9.7 0.85 0.78 0.73 7.9 6.6 6.1 Sources: Bloomberg, CGIS Research 1-Year Relative Performance Sources: Capital IQ, CGIS Research
Figure 1: Regional Cement Price Sources: Digital Cement, CGIS Research
Disclaimer This research report is not directed at, or intended for distribution to or used by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject China Galaxy International Securities (Hong Kong) Co., Limited ( Galaxy International Securities ) and/or its group companies to any registration or licensing requirement within such jurisdiction. This report (including any information attached) is issued by Galaxy International Securities, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to the institutional clients from the information sources believed to be reliable, but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company(ies) referred to herein. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. The recipient of this report should understand and comprehend the investment objectives and its related risks, and where necessary consult their own independent financial advisers prior to any investment decision. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analyst who prepared this report, such views and opinions may not correspond to the published views or investment decisions of China Galaxy International Financial Holdings Limited and any of its subsidiaries ( China Galaxy International ), directors, officers, agents and employees ( the Relevant Parties ). All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. China Galaxy International and/or the Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. Disclosure of Interests China Galaxy Securities (6881.hk) is the direct and/or indirect holding company of the group of companies under China Galaxy International. China Galaxy International may have financial interests in relation to the subjected company(ies) the securities in respect of which are reviewed in this report, and such interests aggregate to an amount may equal to or more than 1 % of the subjected company(ies) market capitalization. One or more directors, officers and/or employees of China Galaxy International may be a director or officer of the securities of the company(ies) mentioned in this report. China Galaxy International and the Relevant Parties may, to the extent permitted by law, from time to time participate or invest in financing transactions with the securities of the company(ies) mentioned in this report, perform services for or solicit business from such company(ies), and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. China Galaxy International may have served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the last 12 months, significant advice or investment services in relation to the investment concerned or a related investment or investment banking services to the company(ies) mentioned in this report. Furthermore, China Galaxy International may have received compensation for investment banking services from the company(ies) mentioned in this report within the preceding 12 months and may currently seeking investment banking mandate from the subject company(ies). Analyst Certification The analyst who is primarily responsible for the content of this report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the securities covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the securities covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong-listed companies covered in this report; and (4) have any financial interests in the Hong Kong-listed companies covered in this report. Explanation on Equity Ratings BUY SELL HOLD : : share price will increase by >20% within 12 months in absolute terms share price will decrease by >20% within 12 months in absolute terms : no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL Copyright Reserved No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited. China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459 Room 3501-3507, 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: 3698-6888.